Starbucks: Social Responsiblity and Tax Avoidance
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University of North Dakota
UND Scholarly Commons
Management Faculty Publications
9-2016
Starbucks: Social Responsiblity and Tax Avoidance
Katherine Campbell
University of North Dakota, katherine.campbell@UND.edu
Duane Helleloid
University of North Dakota, duane.helleloid@UND.edu
Follow this and additional works at: https://commons.und.edu/man-fac
Part of the Taxation Commons
Recommended Citation
Campbell, Katherine and Helleloid, Duane, "Starbucks: Social Responsiblity and Tax Avoidance" (2016). Management Faculty
Publications. 1.
https://commons.und.edu/man-fac/1
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STARBUCKS:
SOCIAL RESPONSIBILITY AND TAX AVOIDANCE
ABSTRACT
This instructional case is designed to explore how accounting choices, and specifically tax
minimization practices, should consider a company’s overall strategy and positioning within
multiple stakeholder groups. Starbucks had been successful in growing its stores and presence in
the United Kingdom (UK), and described the profitable growth to investors as something it
wanted to build on in other international markets. However, in its 15 years of operations in the
UK, the company had paid UK corporate income taxes only once. Using a combination of legal
tax avoidance practices (e.g., transfer prices, royalty payments, interest expense), Starbucks UK
had effectively shifted taxable income to other Starbucks subsidiaries where it would be taxed at
lower rates.
In 2012, Starbucks in the UK faced a public relations furor over its failure to pay British
corporate income taxes. While the tax avoidance practices Starbucks used were common among
multinational companies, Starbucks had been very public in its commitment to being socially
responsible and a good citizen of the communities in which it operated. This included, among
other aspects, paying fair wages to employees and paying fair prices to coffee growers in
developing countries. Thus, its critics found it easy to point out that not paying its fair share of
taxes was inconsistent with the image Starbucks was portraying to consumers.
Case questions are designed to help you think about the strategic, legal, ethical, and public
relations implications of tax minimization strategies, especially when companies portray
themselves as responsible “citizens” of the communities in which they operate. The questions
also probe whether other characteristics of firms, including their “home” country and the nature
of the business, have implications for public perceptions about corporate tax minimization
strategies.
Keywords:
Starbucks
Taxes
Tax avoidance
Transfer prices
Tax havens
Corporate social responsibility
United Kingdom
Great Britain
1
1. Introduction
After years of success and rapid growth, Starbucks found itself struggling as the global economy
entered a financial crisis that would become “the great recession” (Barbaro & Martin, 2008). In
January of 2008, Starbucks’ CEO, Howard Schultz, articulated a “Transformation Agenda” to
address the challenges facing the company and ensure long-term future success (Schultz, 2008).
Although this agenda was multifaceted and outlined many changes, Schultz was careful to note
that the company’s commitment to social responsibility would not change. In the first of a series
of “Transformation Agenda Communications,” Schultz stated:
But even as we execute this transformation, there are certain integral aspects of
our company that will not change at all. These include our commitment to
treating each other with respect and dignity, providing health care and Bean
Stock for all of our eligible full- and part-time partners, and our commitment to
our community efforts, our ethical sourcing practices and encouraging our coffee
suppliers to participate in our CAFE practices program in our origin countries.
(Schultz, 2008)
By the end of 2012, Starbucks was reporting increased earnings, revenue growing at more than
11%, and was raising its forward-looking profit forecasts (Baertlein, 2012). It also found itself
facing a public relations challenge that threatened the company’s brand and reputation for
corporate social responsibility (Houlder, 2012). On October 15, 2012 Reuters published a report
titled, “Special Report: How Starbucks avoids UK taxes” (Bergin, 2012). This report described
the location of Starbucks affiliates and the inter-company transactions that explained how
Starbucks’ UK stores could generate operating profits but legally report no taxable income in the
UK. This story received a lot of media attention, and Starbucks made some attempts to respond
to the criticism it received for its tax avoidance efforts. These responses seemed to only fuel the
criticism from the media, its customers, politicians, and UK businesses that paid UK corporate
tax on profits. Amid UK budget cuts to social services, protesters sought to bring attention to the
impact of corporate tax avoidance on tax revenues and social services in the UK. Starbucks
became a target for protesters because its UK stores were quite visible and reported billions of
pounds of sales, while the company had paid almost no UK income taxes since beginning
operations in 1998. Exhibit 1 includes links to news videos including footage of the protests. 1
Public accusations of “immoral” tax avoidance and “ripping off” taxpayers (Syal & Wintour,
2012) were not consistent with Starbucks’ image and the community responsibility it had
assumed:
1 All data and information are from the time of the UK row over Starbucks’ tax avoidance - late
2012 (the company’s fiscal year ended in 2013). The epilogue provides updated information on
subsequent events. Other companies are currently receiving scrutiny over their tax strategies,
and firms face similar issues on a regular basis. The intent of keeping this case set in 2012 is to
allow readers to experience events as an accountant or tax professional at Starbucks during that
time period.
2
We’ve been building a company with a conscience for more than four decades,
intent on the fair and humane treatment of our people as well as the communities
where we do business, and the global environment we all share. We are proud of
our heritage. Yet never before have we seen the marketplace and today’s
consumers have such a deep interest in and knowledge about what companies
stand for and how they are living up to their promises. Not only is standing for
something beyond making a profit the right thing to do, it is the way business must
be conducted in the 21st century. Only by doing business through the lens of
humanity can an organization establish a crucial reservoir of trust with its people
and its customers. At Starbucks, it is a trust we must earn every day. (Starbucks,
2012c)
Exhibit 1: Video links
Jonathan Paige, theguardian.com, December 8, 2012, video available at
http://www.theguardian.com/business/video/2012/dec/08/uk-uncut-starbucks-taxes-video; last
accessed April 1, 2016.
Starbucks, Amazon, Google accused of UK tax avoidance
NBC Nightly News (reported by iTV’s Libby Weiner), December 3, 2012, video available at
http://www.nbcnews.com/video/nightly-news/50056785#50056785; last accessed April 1, 2016.
3
2. A tale of two Starbucks
Starbucks began UK operations in 1998 (Bergin, 2012), and as of September 29, 2013, 764
stores were open (549 company-owned and 215 licensed stores) (Starbucks, 2013a, pp. 4-6). In
communications with analysts and investors between 2001 and 2011, Starbucks executives
described its UK operations as profitable and held the unit’s successful operation up as a model
for other international markets (Bergin, 2012). Nevertheless, it consistently reported net losses
to UK tax authorities, reporting a taxable profit only once in its first 14 years of operations in the
UK (BBC News, 2013).
Starbucks characterized the performance of its UK operations in distinctly different ways to two
different audiences: to investors, Starbucks described its UK operations as profitable, but to UK
tax authorities the company reported losses (Bergin, 2012). Although this may seem
disingenuous at best, there were no allegations of illegal actions. Financial accounting standards
establish the parameters for reporting net income or loss reported to investors in a company’s
financial statements. Tax rules are distinct from financial accounting standards, making it quite
common for taxable income to differ from net income reported in financial statements.
Multinational corporations like Starbucks have operations in multiple taxing jurisdictions, further
complicating the determination of the amount of income subject to taxation in any particular
country.
3. Incentives and mechanisms for shifting and minimizing taxable income
Countries have different income tax policies, regulations, and rates. This creates incentives for
companies to minimize taxes by shifting taxable income across jurisdictions. For decades,
multinational companies have used well-known techniques to legally shift profits from high tax
countries to lower tax countries. Transfer pricing, for example, is one of the most commonly
used methods to shift profits.
A transfer price is the price charged in a business transaction between entities under common
ownership. Multinational companies can reduce income taxes by locating a subsidiary in a
country with favorable tax policies, and using this subsidiary as a supplier to other subsidiaries
located in higher-tax countries. This tax advantage can be increased by charging the highest
price possible for supplies, reducing the profit reported by the purchasing subsidiaries in high-tax
countries, and increasing that of the supplier (the subsidiary in a low-tax country). Since the
transacting companies are part of the same multinational company, transfer prices and the
allocation of profits across subsidiaries have no effect on the total gross profit reported in the
consolidated financial statements for the entire corporation. However, transfer prices and the
allocation of profit across subsidiaries in multiple tax jurisdictions can substantially affect the
total income tax paid by a multinational company, and thus its consolidated net income. It can
also affect the amount of income tax that a multinational company pays in individual countries.
Transfer prices are established by companies under common control, and it can be difficult to
determine an arms-length transaction price. Substantial judgment is often necessary to determine
4where value is created in order to determine an appropriate transaction price. This creates
opportunities for multinational companies to use transfer pricing opportunistically to minimize
taxes. However, it also creates uncertainty and risk for multinational companies, since transfer
prices are subject to scrutiny by income tax regulators. The amounts involved can be substantial.
For example, in 2006 the US IRS reached a $3.4 billion settlement with GlaxoSmithKline in a
transfer-price dispute (McKinley, 2013).
In recent years, technology companies have become associated with the use of transfer pricing
approaches to reduce income taxes. These companies rely on intellectual property, which is
much easier to move than tangible property. A multinational company’s intellectual property
can be held by one subsidiary that then charges royalty or licensing fees to other subsidiaries. By
selectively choosing the tax jurisdictions where intellectual property is held and establishing the
licensing fees charged, multinational companies can effectively shift income across tax
jurisdictions. Google has been particularly adept at using these techniques to minimize taxes.
Over a three-year period beginning in 2007, Google saved $3.1 billion and increased reported
earnings by 26 percent (Drucker, 2010).
Tax rates vary by country, by the type of activity being taxed, and sometimes through special
arrangements between companies and local tax authorities as part of an incentive package for the
company to make investments in a certain location. For example, 2012 corporate tax rates in
Switzerland were generally under 20% (varying significantly by canton), while corporate taxes
were 24% in UK, 25% in Netherlands, and up to 40% in USA (KPMG, 2016). In certain
countries corporate earnings were not taxed (e.g., Bahamas, Bermuda, Cayman Islands).
However, the Swiss tax rate on commodity trading gains was 5%, and the rate on royalties for
the use of intellectual property was as low as 2% (Bergin, 2012). Ireland also taxed royalties at
5%. Thus, a company that chose to have royalties paid to a subsidiary in a country with lower
taxes on royalties, and traded commodities (e.g., coffee) through countries with lower taxes on
trading gains, could reduce its overall tax bill compared to a company that did not structure
transactions in this manner.
4. How Starbucks’ shifted UK operating profits to other taxing jurisdictions
Transactions between affiliated companies under the common control of Starbucks helped to
create the taxable losses reported to UK tax authorities. These can be categorized into the
following three areas:
Royalty Payments: Starbucks’ UK unit was charged a royalty fee for the right to use intellectual
property including the Starbucks brand and various business operations. This fee, equal to 6
percent of sales, was deductible for UK taxable income. These royalties were channeled through
various Starbucks owned companies in ways that reduced the effective tax rate to less than 5
percent (Wykes, 2013).
For every £1 million revenue, Starbucks UK would pay £60,000 in royalties to another Starbucks
entity and deduct this amount in computing its UK taxable income. If Starbucks UK had not
made these royalty payments, for every £1 million in revenue, its deductible expenses would
5have been lower and its taxable income would have been £60,000 higher. At the UK corporate
tax rate of 24%, Starbucks UK would have been subject to about £14,400 of taxes on every £1
million in revenue. The royalty payments effectively shifted taxable income from the UK to a
jurisdiction with a much lower tax rate.
Transfer Pricing: The coffee sold at Starbucks stores in the UK was purchased from a Starbucks
trading company based in Switzerland, and was roasted by a Starbucks company based in the
Netherlands. Of course the actual coffee beans originated somewhere with a tropical climate,
and may never have passed through Switzerland. Switzerland, however, was just the legal
address for the trading company. Ultimately, the transaction prices between the three Starbucks
entities determined a major component of the cost of the products sold by Starbucks’ UK stores.
By paying a higher price for coffee to another Starbucks entity, Starbucks UK increased costs
and reduced taxable income reported in the UK, thus shifting profit to its Dutch and/or Swiss
entities. Although corporate income tax rates were similar in the UK and the Netherlands (24
and 25 percent, respectively), in Switzerland, profits from international commodity trades were
taxed at 5 percent (Bergin, 2012). Starbucks also had a special tax agreement with the
Netherlands as part of its agreement to locate its roasting facilities there. Thus, Starbucks’
corporate tax rate in the Netherlands was lower than the standard corporate rate (European
Commission, 2015).
Example: Assume that Starbucks Switzerland paid suppliers £900,000 to have green (un-
roasted) coffee delivered to Starbucks roasting facilities in the Netherlands, and charged the
Dutch roasting entity £1.2 million for the beans and its sourcing services. The Dutch entity then
roasted the beans, and sold them to Starbucks UK for £1.5 million to cover the cost of roasting
and transport, as well as a royalty payment it made to another Starbucks entity for the
“knowledge” it used to roast and package the beans. Assuming that the actual cost of the coffee
delivered to the UK, including transportation, logistics management, and roasting, was £1
million, Starbucks UK paid an extra £500,000 for the roasted coffee. The inflated transfer price
increased Starbucks UK’s deductible costs, and thus reduced its taxable income by £500,000.
At the UK corporate tax rate of 24%, if this transfer price had not been inflated, £500,000 would
have flowed through to taxable income, and Starbucks UK would have owed £120,000 in taxes
for every £1 million worth of roasted coffee beans.
Inter-company debt: Starbucks financed the growth of its UK operations with inter-company
debt, and charged an interest rate (LIBOR2 plus 4%) that was substantially higher than its
corporate bond rate (LIBOR plus 1.3%) and the rate that other US multinational restaurant
chains charged their subsidiaries (typically LIBOR plus 2%) (Bergin, 2012). The interest
Starbucks UK paid to other Starbucks companies was deductible and reduced the amount of
income subject to tax in the UK. Starbucks UK paid £2 million in interest payments to other
Starbucks companies in its 2012 fiscal year (Bergin, 2012). Because of the high inter-company
interest rate, Starbucks UK paid approximately £1 million more interest than it would have paid
at its corporate bond rate. At a corporate tax rate of 24%, this incremental interest expense
reduced UK taxes by £240,000. Starbucks UK’s interest payments would represent interest
2LIBOR is an interest rate that banks charge each other, and is typically used as a benchmark for
setting other interest rates.
6revenue for another Starbucks entity and be subject to income tax, but once again that entity
would be strategically located in a tax haven where the rate was substantially lower than the rate
in the UK.
5. Starbucks and social responsibility
Since 2001, Starbucks articulated a commitment to corporate social responsibility and issued a
Global Responsibility Report (Starbucks, 2013b). Exhibit 2 includes excerpts from Starbucks’
2013 Annual Report (filed with the Securities Exchange Commission as Form-10K) that reflect
the importance of social responsibility to the company’s business and brand. In 2008, the
company established a set of goals related to ethical sourcing, environmental impact, and
community improvement (Starbucks, 2013b, p. 3). Starbucks’ annual Global Responsibility
Report includes a summary of its performance related to these goals. The Starbucks Global
Responsibility Goal Performance Summary for fiscal 2013 is reproduced in Exhibit 3.
Exhibit 2
Selected excerpts from Starbucks 2013 Annual Report regarding social responsibility
(emphasis added)
Item 1. Business
Global Responsibility
We are committed to being a deeply responsible company in the communities where we do
business. Our focus is on ethically sourcing high-quality coffee, reducing our environmental
impacts and contributing positively to communities around the world. Starbucks Global
Responsibility strategy and commitments are integral to our overall business strategy. As a result,
we believe we deliver benefits to our stakeholders, including employees, business partners,
customers, suppliers, shareholders, community members and others. For an overview of Starbucks
Global Responsibility strategy and commitments, please visit www.starbucks.com.
Item 1A. Risk Factors
You should carefully consider the risks described below. If any of the risks and uncertainties described in
the cautionary factors described below actually occurs, our business, financial condition and results of
operations, and the trading price of our common stock could be materially and adversely affected.
Moreover, we operate in a very competitive and rapidly changing environment. New factors emerge from
time to time and it is not possible to predict the impact of all these factors on our business, financial
condition or results of operation...
Our success depends substantially on the value of our brands and failure to preserve their value,
either through our actions or those of our business partners, could have a negative impact on our
financial results. We believe we have built an excellent reputation globally for the quality of our
products, for delivery of a consistently positive consumer experience and for our corporate social
responsibility programs. Our brand is recognized throughout the world and we have received high
ratings in global brand value studies. To be successful in the future, particularly outside of US, where the
Starbucks brand and our other brands are less well-known, we believe we must preserve, grow and
leverage the value of our brands across all sales channels…
Business incidents, whether isolated or recurring and whether originating from us or our business
partners, that erode consumer trust, such as contaminated food, recalls or actual or perceived breaches of
privacy, particularly if the incidents receive considerable publicity or result in litigation, can significantly
7reduce brand value and have a negative impact on our financial results. Consumer demand for our
products and our brand equity could diminish significantly if we or our licensees or other business
partners fail to preserve the quality of our products, are perceived to act in an unethical or socially
irresponsible manner, fail to comply with laws and regulations or fail to deliver a consistently
positive consumer experience in each of our markets. Additionally, inconsistent uses of our brand and
other of our intellectual property assets, as well as failure to protect our intellectual property, including
from unauthorized uses of our brand or other of our intellectual property assets, can erode consumer trust
and our brand value and have a negative impact on our financial results.
Source: Starbucks. (2013a). Annual Report. Retrieved from
http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-reportsAnnual; last accessed April
1, 2016.
Exhibit 3
Starbucks global responsibility goal performance summary for fiscal 2013
Source: Starbucks Global Responsibility Report, Goals and Progress 2013, p. 28
Additionally, Starbucks took strong positions regarding its responsibility to employees.
Starbucks refers to employees as “partners” and provides benefits to all partners working 20 or
more hours per week. These benefits include store discounts, weekly free coffee, 401(k) plans
with matching contributions, discounted stock purchase options, tuition discounts at certain
universities and a limited tuition reimbursement program, adoption assistance and health
insurance for employees, their dependents, and domestic partners (Starbucks, 2012b).
Starbucks also took a strong position on the minimum wage. All Starbucks employees earned
more than the federal minimum wage, and Howard Schultz, the CEO, has supported increasing
8the minimum wage (Lobosco, 2014). Starbucks also has programs designed to create jobs
(Starbucks, 2014a), and since 2007 has been a member of the Armed Forces Network, an
organization that seeks to help employ and support veterans and military spouses (Starbucks,
2014b, Starbucks 2013c).
Starbucks’ website provides a link to awards and recognition that it has received. Exhibit 4
reproduces this list from 2012. The list is prefaced with the statement that, “Since the beginning,
Starbucks has been a different kind of company. One that is dedicated to inspiring and nurturing
the human spirit.” (Starbucks, 2012a). Most of these awards relate to Starbucks’ social
responsibility accomplishments, and the selection of awards included on the list reflects the value
that the company places on recognition for ethical and responsible behavior.
Exhibit 4
Starbucks company recognition
Source: Starbucks website accessed January 7, 2015. This link is no longer available.
http://globalassets.starbucks.com/assets/5e71c94483a44a5db41abf79581fbf22.pdf
96. Starbucks’ initial response to the UK protests
Reuters published its “Special Report: How Starbucks avoids UK taxes” on October 15, 2012
(Bergin, 2012). The company responded quickly to the media attention, posting a statement on
its website entitled “Starbucks Commitment to the UK” on October 17th (Engskov, 2012a),
reproduced in Exhibit 5. In this statement, Starbucks Coffee UK’s managing director, Kris
Engskov, noted that while Starbucks had not paid UK corporate income tax, it had paid hundreds
of millions of pounds in a variety of taxes in the UK, including National Insurance contributions
for its employees. He also noted that the company was investing in UK operations, and
contributing to the UK economy by opening hundreds of new stores, creating thousands of new
jobs, and purchasing services and supplies from UK companies. By creating income
opportunities of individuals and other UK businesses, Starbucks’ economic activities helped
generate UK tax revenues (Engskov, 2012a).
Exhibit 5
October 17, 2012 Statement by Starbucks Coffee UK’s managing director
Starbucks Commitment to the UK
17 October 2012
Posted by Starbucks
Following a number of stories in the media over the last day about Starbucks and the amount of tax we pay each
year, I believe it’s important that we share the facts with you on this important issue.
The most important thing to understand is that Starbucks does pay tax in the UK. Indeed over the last three years
we have paid over £160 million in various taxes including National Insurance contribution for our 8,500 UK
employees, and business rates.
The truth of the matter is, the one tax that has been debated in the media, corporation tax, is based on the profits
we make in this country – and regrettably we are not yet as profitable as we’d like to be. Is our ambition to be
much more profitable, and therefore pay more corporation tax? Absolutely right, and that is why we are making
long-term investments in the UK, creating new jobs, opening new stores and delivering new and innovative
products for our customers.
The UK represents a very important market for us and I want to be really clear about what contribution we make to
the country. Yes, we pay our taxes, but we are here to invest and grow the business. We have raised capital to
invest in 5,000 new jobs and open 300 new stores up and down the country. We are also creating 1,000
apprenticeship positions. We contribute to Britain by buying local products such as cakes, milk, sandwiches and
using local suppliers to do things like store design and renovation. I am confident these kinds of investments will
make us more profitable in the future, and as a result, the corporation tax we pay will increase.
I also wanted to clear up some misapprehensions about a few aspects of our business that have impacted our
financial performance: how we source and roast our coffee beans, the royalty we pay to use the Starbucks brand in
the UK and the competitive nature of selling coffee in the UK.
Let me start with the beans. To achieve economies of scale for the region we have a buying operation in
Switzerland and a shared roasting plant in Amsterdam – it doesn’t make good business sense for wholesale bean
buying or roasting to happen in each country. So for the UK we buy and roast our coffee in Europe, the same as
other Starbucks businesses in the region.
In terms of the fees we pay to use the Starbucks brand, we pay a royalty levied against our revenues to use the
brand in the UK. This is applied wherever we operate in the world at a consistent rate, as is the case for many
other global brands.
Finally, the UK is one of the most competitive places to sell coffee in the world and this has had a real impact on
the profits we make and therefore the corporation tax we generate. There are three reasons for this. The rent we
pay on our stores here in the UK is among the highest in the world. We spend more on the quality of our coffee
than our competitors – offering 100% Arabica and 100% Fairtrade espresso coffees. We also spend more on store
design so the customer experience is as good is it could possibly be. We have heard that these investments in
quality are important to our customers and they are certainly important to us – and well worth the investment. We
10haven’t always got it right in the past but all of these initiatives, and our focus on making sure we give British
customers what they want and need, have put us on a track for growth.
I want to say that this is a really important issue to me and to Starbucks. The UK is one of the most dynamic
espresso markets in the world, and we’re proud to do business and pay taxes here. As we continue to grow, we
will employ more and more partners and contribute to the communities where we do business in new and
meaningful ways.
Thank you for listening and I look forward to reading your comments and suggestions.
Kris Engskov
Managing director
Starbucks Coffee UK
Source: http://www.starbucks.co.uk/blog/starbucks-commitment-to-the-uk/1240, last accessed
April 1, 2016.
Mr. Engskov acknowledged that Starbucks Coffee UK did buy coffee that was sourced by a
Swiss affiliate and roasted by a Dutch affiliate, but argued that this made good business sense
due to economies of scale. He justified the royalty fee paid for use of the Starbucks brand by
arguing that this fee was applied globally at a consistent rate and that the practice was similar to
that of other companies with global brands. Mr. Engskov did not comment on the tax
implications of its transfer pricing or the tax benefits of the particular arrangements of the
transactions across affiliates based in countries with different tax policies (Egnskov, 2012a).
As media attention grew, and Starbucks’ UK tax avoidance was criticized by its customers,
politicians, UK competitors and other UK businesses that paid the UK corporate tax on income,
Starbucks once again responded with a public statement. On December 6, 2012 Mr. Engskov
posted an “open letter” on the company’s website and made a speech at the London Chamber of
Commerce & Industry announcing its decision to change its approach to corporate tax (Engskov,
2012b). While reiterating that Starbucks had always paid taxes in accordance with the law, Mr.
Engskov announced that the company would “voluntarily” choose not to claim UK tax
deductions for inter-company royalty payments, interest charges or mark-ups on coffee included
in transfer prices. Starbucks estimated that in 2013 and 2014 it would pay approximately £10
million in each year for UK corporate tax on income (Engskov, 2012b). Mr. Engskov’s open
letter is reproduced in Exhibit 6, and a link to his speech announcing the change in tax policy is
provided in Exhibit 7. On its UK website, Starbucks posted a page with Tax FAQs that includes
a link to the London Chamber of Commerce and Industry speech (Starbucks, 2014c).
Exhibit 6
December 6, 2012 open letter from Starbucks Coffee UK’s managing director
An Open Letter from Kris Engskov
06 December 2012
Posted by Kris Engskov - managing director Starbucks Coffee Company UK
Today, we’re taking action to pay corporation tax in the United Kingdom– above what is
currently required by tax law. Since Starbucks was founded in 1971, we’ve learned it is vital
to listen closely to our customers – and that acting responsibly makes good business sense.
Over the more than 14 years we’ve been in business here in the UK, the most important
asset we have built is trust. Trust with our partners (employees), our customers and the
wider society in which we operate.
11The fact remains that Starbucks has found making a profit in the UK to be difficult. This is a
hugely competitive market and we have not performed to our expectations over the many
years we’ve been in business here.
It has always been our plan to become sustainably profitable in the UK. We annually inject
nearly £300 million into the UK economy and are exploring additional initiatives to expand
our growth and speed our way to profitability in future.
And while Starbucks has complied with all UK tax laws, today we are announcing changes
that will result in the company paying higher corporation tax in the UK. Specifically,
Starbucks will not claim tax deductions for royalties and standard intercompany
charges. Furthermore, Starbucks will commit to paying a significant amount of tax during
2013 and 2014 regardless of whether the company is profitable during these years.
Starbucks will continue to open our books to HM Treasury and HM Revenue and Customs on
an ongoing basis to ensure our financial performance and tax structure is transparent and
appropriate.
The commitments Starbucks is making today are intended to begin a process of enhancing
trust with customers and the communities that we have been honoured to serve for the past
14 years. And we will do even more. Our contribution will increase as we train over 1,000
apprentices over the next two years and pursue a series of initiatives that will increase
employment and investment.
We know we are not perfect. But we have listened over the past few months and are
committed to the UK for the long term. We hope that over time, through our actions and
our contribution, you will give us an opportunity to build on your trust and custom.
Yours sincerely,
Kris Engskov, managing director, Starbucks Coffee Company UK
Source: http://www.starbucks.co.uk/blog/an-open-letter-from-kris-engskov/1249; last accessed
April 1, 2016.
Exhibit 7
12Link to video of Mr. Engskov’s December 6, 2012 announcement of Starbuck’s change in tax
policy.
Source: http://www.starbucks.co.uk/our-commitment; last accessed April 1, 2016.
13Starbucks’ decision to pay more UK tax than required by law did little to defuse protests about
its tax avoidance practices and failure to pay UK corporate tax on income (Houlder, Jopson,
Lucas & Picard, 2012). UK Uncut, the group responsible for organizing many of the tax
avoidance protests at Starbucks stores in the UK, posted a press release on December 8, 2012
that commented:
Responding to Starbucks’ announcement that it will not claim tax deductions in
the UK on a range of its tax arrangements and Starbucks statement regarding
worker safety, Hannah Pearce, a UK Uncut supporter said:
“Offering to pay some tax if and when it suits you doesn’t stop you being a tax
dodger. This is just a PR stunt straight out of the marketing budget in a desperate
attempt by Starbucks to deflect public pressure – hollow promises on press
releases don’t fund women’s refuges or child benefits”…
Kara Moses, at the UK Uncut protest in Birmingham, said “So many people have
come to this protest because there is genuine public outrage that multinational
companies are being allowed to avoid tax while benefits and essential services
are cut. Starbucks’ admission that they have not been paying enough tax is a
clear admission of guilt, and shows that direct action by the public works. We will
keep the pressure up to end tax avoidance and these cuts that are devastating
women’s lives around the country.” (UK Uncut, 2012)
Even UK tax officials and politicians responded negatively to Starbucks’ announcement. BBC
News quoted Stephen Williams, a Treasury spokesman for the Liberal Democrats, as stating:
“People have been joking that some of these multinationals seem to think that
paying tax is voluntary. Well Starbucks have just confirmed the joke really.
Tax is something that is a legal obligation that you should pay according to the
tax rules of a particular country. It's not a charitable donation in order to gain
sort of brand value. But that seems to be what Starbucks are doing.” (BBC News,
2012)
7. Starbucks mission, taxes, and social responsibility
Starbucks’ Mission Statement included phrases including “To inspire and nurture the human
spirit,” “we take our responsibility to be good neighbors seriously,” and “The world is looking to
Starbucks to set the new standard.” (See Exhibit 8 for Starbucks complete mission statement,
circa 2011.) Starbucks’ practices to shift income from the UK to low tax countries were
completely legal, and common for multinational companies. As a company that portrayed itself
as being a responsible citizen in the countries in which it operated, the criticisms that it paid no
UK corporate income taxes had clearly hit a chord with consumers and the media in the UK It
was clear that Starbucks’ initial explanations, and then its subsequent decision to voluntarily pay
income taxes, had not quieted critics. As the company considered what further action should be
14taken, it needed to consider not only the public relations implications, but also whether the
negative publicity would influence “socially responsible consumers” to shift their business to
competitors.
Exhibit 8
Starbucks mission statement
To inspire and nurture the human spirit— one person, one cup, and one neighborhood at a time.
Here are the principles of how we live that every day:
Our Coffee It has always been, and will always be, about quality. We’re passionate about ethically sourcing the
finest coffee beans, roasting them with great care, and improving the lives of people who grow them. We
care deeply about all of this; our work is never done.
Our Partners We’re called partners, because it’s not just a job, it’s our passion. Together, we embrace diversity to
create a place where each of us can be ourselves. We always treat each other with respect and dignity. And
we hold each other to that standard.
Customers When we are fully engaged, we connect with, laugh with, and uplift the lives of our customers— even
if just for a few moments. Sure, it starts with the promise of a perfectly made beverage, but our work goes
far beyond that. It’s really about human connection.
Our Stores When our customers feel this sense of belonging, our stores become a haven, a break from the worries
outside, a place where you can meet with friends. It’s about enjoyment at the speed of life—sometimes
slow and savored, sometimes faster. Always full of humanity.
Our Neighborhood Every store is part of a community, and we take our responsibility to be good neighbors
seriously. We want to be invited in wherever we do business. We can be a force for positive action—
bringing together our partners, customers, and the community to contribute every day. Now we see that our
responsibility—and our potential for good—is even larger. The world is looking to Starbucks to set the new
standard, yet again. We will lead.
Our Shareholders We know that as we deliver in each of these areas, we enjoy the kind of success that rewards
our shareholders. We are fully accountable to get each of these elements right so that Starbucks—and
everyone it touches—can endure and thrive.
Source: This version of Starbucks’ mission statement comes from an author’s file, circa 2011.
This version can also be found in Harvard Business School Case 9-314-068, Starbucks Coffee
Company: Transformation and Renewal. The company has since adopted a different mission
statement.
8. Questions
1. How were Starbucks’ consolidated financial statements affected by Starbucks’
efforts to minimize UK corporate tax?
2. What tax strategies did Starbucks use to minimize the taxes it paid in the UK?
3. Is the allegation that Starbucks did not pay its “fair share” of UK taxes accurate?
4. Is it inconsistent for a company to claim to be socially responsible, and take credit
for paying fair wages to employees and fair prices to suppliers in developing
countries, and then not pay their “fair share” of taxes to local governments?
5. Even if it is legal for a company to avoid paying taxes in a country (or state,
county, or city), is it ethical to shift taxable income away from the jurisdiction
generating the profits to another jurisdiction with a lower income tax rate?
6. What organizational goals were affected by Starbucks’ efforts to minimize taxes?
How should this affect the company’s future tax planning?
157. Prior to the negative publicity, which stakeholders were the primary beneficiaries
of Starbucks tax avoidance in the UK? Which stakeholders were potentially
harmed by Starbucks’ tax avoidance?
8. If tax avoidance is a common practice among multinational companies, why was
Starbucks targeted for its tax avoidance activities?
9. The media reports and protests focused on the amount of income taxes that
Starbucks paid in the UK. Are Starbucks’ other contributions to UK tax revenue
relevant to this discussion? Why was the attention focused solely on Starbucks’
corporate income taxes?
10. What motivations might underlie Starbucks’ decision to voluntarily pay corporate
income taxes in the UK?
9. Teaching notes
9.1 Educational objectives
This case is intended for use in an upper level financial accounting course, and has been tested in
a senior-level capstone financial accounting course. The case describes how Starbucks’ reported
its UK financial results for tax purposes differently than it described the performance of its UK
operations to investors. This case could also be used in taxation or ethics classes, but we do not
have data on efficacy in those courses, and instructors would likely choose to structure the
discussion or written assignments in those courses differently than is outlined in this teaching
note. Key objectives of the case are to help students:
- identify the potential inconsistencies between utilizing tax avoidance strategies while
simultaneously portraying an image of corporate social responsibility
- explain how some stakeholders might be negatively impacted by a company’s aggressive
tax avoidance strategy
- appreciate some of the ethical issues that should be considered prior to shifting taxable
income from high tax locales to lower tax locales
- explain how a company’s organizational goals (e.g., growth, profits, reputation) could be
negatively impacted by a decision to aggressively pursue legal tax avoidance practices
The ten discussion questions listed in Section 8 are designed to get students to think about
specific issues that will facilitate meeting the four educational objectives through knowledge
building. The core issue in the case is whether it is disingenuous for a firm that deliberately
projects an image of social responsibility to practice tax avoidance. Simply stated, is paying
one’s fair share of taxes an important aspect of social responsibility, in the same way as fair
wages for workers, charitable contributions, sustainability, and environmental responsibility?
This issue illustrates the potential relation between tax strategies and other corporate priorities
and strategies, and thus the importance of communication between accountants/tax advisors and
those responsible for overall strategies, corporate brands, and public relations.
9.2 Conceptual background
This case is meant to generate discussion around two primary topics: corporate social
responsibility and stakeholder management in the context of tax planning. It clearly could also
16be used to explore some international business and public relations issues. These last two issues
are identified in the case, and briefly brought up in the discussion questions, but are not explored
in any detail.
The issue of corporate social responsibility now appears in most principles of management
textbooks, business and government textbooks, and strategic management textbooks. Thus, most
accounting students are exposed to the topic on several occasions as part of their core courses in
their business curriculum. One definition of corporate social responsibilty is as follows:
Corporate social responsibility occurs when an organization seeks to meet or
exceed legal and normatively mandated standards, by considering the greater
good of the widest possible community within which it exists, both in local and
global terms, with regard to the environmental, social, economic, legal, ethical,
and philanthropic impact of the organization’s way of conducting business and
the activities it under takes. (Clegg, Kornberger, & Pitsis 2011, page 405)
The question of whether corporate social responsibility “pays off” for a company has generated
many empirical and philosophical articles, with a fairly comprehensive review by Vogel (2005).
He concludes that “the business case for virtue is strongest for firms that have made CSR a part
of their strategy for attracting and retaining customers, employees, investors, and for highly
visible global companies that have been targeted by activists.” It would appear that Starbucks
fits this definition.
Stakeholders are those individuals or groups whose interests can be affected by an organization’s
decisions, and/or can affect an organization. While the lists of which individuals and groups
constitute stakeholders of a corporation varies across books and definitions, most definitions
refer to both internal and external stakeholders (e.g., Kinicki & Williams 2013, page 69). A
corporation’s obligation to communities is often mentioned, as is the importance of interacting
with government regulators.
Myron Scholes and Mark Wolfson (1992) developed a widely known view of tax planning that
takes into consideration all taxes (i.e., explicit and implicit), effects on all parties, and all costs
(i.e., financial reporting, agency, etc.). Another important concept in tax planning is that
companies cannot minimize taxes without affecting other organizational goals (Scholes,
Wolfson, Erickson, Hanlon, Maydew & Shevlin, 2014). These concepts can be discussed in the
context of Starbucks’ UK operations and its efforts to minimize income taxes.
9.3 Evidence regarding case efficacy
The public backlash Starbucks (and several other US companies, including Apple and Google)
faced in the UK over their tax avoidance practices was discussed in an undergraduate Advanced
Accounting class, and students’ engagement in these discussions provided encouragement for
writing this case. As there were only lower level course offerings for accounting students in
Summer 2015, the case was beta-tested in a Strategic Management class that had a large number
of accounting students.
17Approximately a week before the case was distributed in Summer 2015, students were asked to
respond to two questions regarding their views on topics that would be discussed in this case. 3
After the cases were discussed, students answered the exact same questions again. Each student
provided a unique identifier so that the pre and post responses could be matched. Each student
also indicated his or her major. Students were asked to respond whether they strongly agreed,
agreed, were neutral, disagreed, strongly disagreed, or had no opinion regarding the following
statements:
1. It is the duty of public companies such as Starbucks, Amazon, Ford, United
Airlines, etc., to do everything legally allowable to minimize the overall taxes
paid to the cities, states, and countries in which they operate.
2. A company should engage in smart tax strategies to shift profits from high tax
locations to low tax locations (or tax havens) as long as no tax laws are broken.
The results were scored with a “1” for strongly agreed and a “5” for strongly disagreed, with 2-3-
4 corresponding to the intermediate responses. Exhibit 9 summarizes the results of the pre and
post case questionnaires, including analysis of the difference in mean values for the pre and post
case questionnaires.
Exhibit 9
Evidence of changes in students’ views
Results of Student Pre-case and Post-case Student Questionnaires
Observations Observations Average Pre Average Post Average Pre Average Post
(All Students) (Accounting Response Response (All Response Response
Students) (All Students) Students) (Accounting (Accounting
Students) Students)
Q1 – Tax 57 23 2.32 2.91 2.13 2.87
Minimization t-statistic = 3.97 t-statistic = 3.51
P < .0001 P- This highlights a philosophical divide between a shareholder and stakeholder view of
business.
- I never thought that a tax strategy needed to do more than follow the laws and
minimize taxes. But I guess it is better to pay some taxes to avoid being
called out in the media.
- The protestors don’t really care about the taxes, they just want some big company to
protest against. They should be protesting [in parliament], not a coffee shop.
Some students’ responses went the other way (they became more adamant that companies should
engage in tax minimization), and in discussions, it became clear that these students thought
Starbucks was doing the right thing, and they thought it was wrong for Starbucks to be taking the
heat for just following the laws.
Accounting students were generally sympathetic to Starbucks, and to the work of the accountants
and tax planners. They felt these individuals were simply doing their job, as it was understood to
be. But the students also recognized that the result of this “effective” tax planning had caused a
great deal of bad press for Starbucks, distracted management from more important tasks, and was
not consistent with the image of corporate social responsibility that Starbucks was trying to
convey to its stakeholders.
Desiring more data from accounting students on case efficacy, the exact same case was
distributed to 39 students in a senior-level capstone financial accounting course in Fall 2015.
Several of the discussion questions were slightly modified or dropped, based on the different
audience (a capstone financial accounting course in fall compared to a strategic management
class in the summer), and to improve the clarity of the questions. The case was distributed a
week in advance of the scheduled class discussion, and students were asked to prepare and
submit written answers to the discussion questions prior to the class discussion. Exhibit 10
highlights observations from their written answers.
Exhibit 10
Students written responses to discussion questions
Discussion Question Comments on Students’ Written Answers
(with percentage of students receiving a “C”
or better on this question in parentheses)
1. How were Starbucks’ consolidated financial Students had little difficulty with this question, as this is stated in
statements affected by Starbucks’ efforts to the case and is consistent with students’ knowledge from prior
minimize UK corporate tax? accounting classes. (100)
2. What tax strategies did Starbucks use to minimize Students had little difficulty repeating the information from the
the taxes it paid in the UK? case. (100)
3. Is the allegation that Starbucks did not pay its “fair The class was about split about 50/50 on this, and both sides were
share” of UK taxes accurate? able to provide a justification for their position. (100)
4. Is it inconsistent for a company to claim to be The majority of the class believed that there was an inconsistency,
socially responsible, and take credit for paying fair and effectively justified their answer. A minority argued that “fair
wages to employees and fair prices to suppliers in share” and “legal” were equivalent concepts and were not
developing countries, and then not pay their “fair convinced that there was any inconsistency. A couple of students
share” of taxes to local governments? missed the point of this question. (95)
5. Even if it is legal for a company to avoid paying The quality of students’ answers to this question varied
taxes in a country (or state, county, or city), is it considerably, and the difference may have been influenced by
ethical to shift taxable income away from the whether they had (or were simultaneously) taking an accounting
ethics class. Some students clearly articulated an ethical
19jurisdiction generating the profits to another framework for decision-making (e.g., utilitarian), while others
jurisdiction with a lower income tax rate? offered no basis, and others simply equated legal with ethical. (85)
6. What organizational goals were affected by Students had little difficulty with this question, and regardless of
Starbucks’ efforts to minimize taxes? How should their previous views on fairness, equity, and inconsistencies, were
this affect the company’s future tax planning? clear that tax planning would change going forward. (100)
7. Prior to the negative publicity, which stakeholders Most students struggled with this, perhaps because their exposure
were the primary beneficiaries of Starbucks tax to stakeholder analysis had occurred a couple years prior. Few
avoidance in the UK? Which stakeholders were went past direct stakeholders (e.g., shareholders, UK government),
potentially harmed by Starbucks’ tax avoidance? and most provided perfunctory responses. (With minimal
prodding, a much more extensive list of stakeholders was
discussed in class.). (60)
8. If tax avoidance is a common practice among While not explicitly discussed in the case, most students had little
multinational companies, why was Starbucks difficulty identifying the reasons why Starbucks had been
targeted? targeted. (95)
9. The media reports and protests focused on the There were a wide range of answers to this question, ranging from
amount of income taxes that Starbucks paid in the talk of media conspiracy to views that it seems pretty obvious that
UK. Are Starbucks’ other contributions to UK tax profits were being hidden or shifted. (80)
revenue relevant to this discussion? Why was the
attention focused solely on Starbucks’ corporate
income taxes?
10. What motivations might underlie Starbucks’ Students had little difficulty with this question. (100)
decision to voluntarily pay corporate income taxes
in the UK?
Class discussion of the case generally followed that outlined in Section 9.4 (Implementation
Guidance), which follows this section. The class began with a fairly lengthy discussion of
Starbucks mission, and its emphasis on corporate social responsibility. All students were
familiar with the company, and some expressed how the values of the company mattered to
them. Others indicated that a simple desire for coffee and a good place to study motivated them
to frequently visit Starbucks, and they had no interest in the company’s social mission. The class
moved through the basic accounting issues quickly, and spent little time on the issues related to
public relations. The discussion of what constitutes a “fair share” of taxes and whether avoiding
taxes is ethical generated considerable debate, most quite healthy. It was important to make sure
the different sides and rationales were openly discussed, not with a goal of changing opinions,
but with a goal of understanding the bases for different opinions. The purpose of the case
discussion, as it addressed topics related to questions 3 through 9, was not to identify correct or
incorrect answers, but to deepen and broaden understanding of the issues and perspectives. At
the conclusion of the class, a survey was distributed asking students to reflect on what they had
learned, as presented in Exhibit 11.
Exhibit 11
Students views regarding the case’s impact on their understanding of issues
Post Case Discussion Student Survey Results
Strongly Agree = 1 Agree = 2. Neutral = 3 Disagree=4 Strongly Disagree=5
Mean Median Probability that the
(n=39) (n=39) mean is 3 or greater.
1. This case helped me understand the mechanisms used by some
companies to minimize their taxable income in certain countries, 1.46 13. This case helped me understand the potential inconsistencies
between utilizing tax avoidance strategies while simultaneously 1.82 2code. While the transactions have no effect on operating profit, they clearly impact taxes and net
income.5 A numerical example that faculty may find useful to share with students is available
upon request.
The next topic for discussion is the media reports, protests, and Starbucks’ responses to the issue.
While Starbucks’ Kris Engskov attempted to address the situation and put his company in a good
light, it appears his efforts proved unsuccessful in deflecting criticism. As described in Section
9.6 (Epilogue), Starbucks’ UK sales suffered, suggesting there was a real business cost to
Starbucks’ tax avoidance transactions – a cost that might have been greater than the tax savings.
The final aspects of the discussion will certainly vary depending on instructors’ preferences, and
the place in the course when this case is taught. A generic closing is to emphasize how everyone
in a company needs to understand the strategy of a company, the company’s relations with
stakeholders, and potential implications of decisions they make. It would appear that Starbucks’
employees and its tax advisors involved with tax planning and tax strategies did not consider
how stakeholders could view tax avoidance as inconsistent with Starbuck’s mission and
espoused socially responsible values.
Faculty are encouraged to modify the discussion questions as they see fit, given their context and
the preparation of students in ethics and stakeholder analysis. It may also be appropriate for
faculty to add questions related to issues related to other corporations’ tax avoidance strategies
that are in the news at the time the case is taught.
9.5 Solutions
Suggested answers to the discussions questions, a hypothetical numerical example comparing
taxes payable for a firm not using tax avoidance strategies to one using the case tax avoidance
strategies, and a grading rubric, are available upon request from Duane Helleloid
(duane.helleloid@und.edu).
9.6 Epilogue
Subsequent to its announced plan to voluntarily pay more UK corporate taxes than required by
law, Starbucks did indeed pay taxes. After paying no UK corporate tax for many years,
Starbucks promptly began fulfilling its pledge and paid approximately £5 million in June 2013
(Petroff, 2013). In December 2014, Starbucks made the final £5 million payment of the £20
million of the taxes it voluntarily pledged to pay (Neville, 2014). A statement near the time of
this final tax payment suggesting that it would be years before the company would generate a
profit and pay “normal” taxes in the UK, however, sparked renewed furor (Neville and Prynn,
2014). In 2015, Starbucks UK reported a pre-tax profit of £34million, and paid taxes of just over
£8 million (Davies, 2015).
5 Interestingly enough, and this is not in the case since it makes the discussion potentially more
confusing, Starbucks has an effective tax rate of about 32% during this time period. This
indicates that the company was paying income taxes at a substantial rate somewhere, even
though it had not been paying corporate taxes in the UK.
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